UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the quarter ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____________ to_____________
Commission File Number: 001-12885
AVENUE ENTERTAINMENT GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4622429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11111 Santa Monica Blvd., Suite 2110
Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
(310) 996-6815
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section ______ of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period) that the Registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ______
Number of shares outstanding of each of issuer's classes of common stock as of
August 12, 1997.
Common Stock 3,747,838
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No
Consolidated Condensed Balance Sheets -
June 30, 1997 and December 31, 1996 1
Consolidated Condensed Statement of Operations -
Three Months and Six Months Ended
June 30, 1997 and 1996 2
Consolidated Condensed Statement of Cash Flows -
Six Months Ended June 30, 1997 and 1996 3
Notes to Consolidated Condensed Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Signatures 11
<PAGE>
PART I. FINANCIAL INFORMATION
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
1997 1996
Assets (unaudited)
Cash $ 390,678 $ 687,080
Short-term investments 707,419 696,150
Accounts receivable 444,039 149,483
Films costs, net 1,546,169 1,998,326
Property and equipment, net 120,772 117,492
Other assets 63,581 81,063
Goodwill 2,594,809 2,735,069
----------- -----------
Total assets $5,867,467 $6,464,663
========== ==========
Liabilities and Stockholders' Equity
Accounts payable $ 489,979 284,784
Accrued expenses 574,104 457,426
Loan payable 140,000
Capitalized lease obligations 22,948 40,451
Income taxes payable 87,000 330,891
Advance from customers 42,000 577,730
--------- ---------
Total liabilities 1,356,031 1,691,282
--------- ---------
Stockholders' equity
Common stock, par value $.01 per share 37,478 36,978
Additional paid-in capital 4,799,502 4,631,252
Retained earnings (deficit) (67,963) 224,001
Unrealized loss on marketable securities (107,581) (118,850)
Note receivable for common stock (150,000) _________
-----------
Total stockholders' equity 4,511,436 4,773,381
---------- ----------
Total liabilities and stockholders' equity $5,867,467 $6,464,663
========== ==========
See accompanying notes to the consolidated condensed financial statements.
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<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
1997 1996 1997 1996
------- ------ ------- -------
<S> <C> <C> <C> <C>
Operating revenues $ 352,151 $ 602,477 $2,126,312 $ 971,482
---------- ---------- ---------- ----------
Cost and expenses:
Film production costs 98,201 169,704 1,150,828 298,260
Selling, general & administrative
expenses 634,311 547,836 1,339,815 728,666
---------- --------- ---------- --------
Total costs and expenses 732,512 717,540 2,490,643 1,026,926
---------- ---------- ---------- -----------
Loss before income tax (380,361) (115,063) (364,331) (55,444)
Income tax benefit (expense) 84,531 10,908 72,367 (8,092)
------------ ---------- ----------- -----------
Net loss $ (295,830) $(104,155) $(291,964) $ (63,536)
========== ========= ========= =========
Net loss per share $ (.08) $ (.06) $ (.08) $ (.04)
=============== ============= ============== ============
Weighted average shares
outstanding 3,735,338 1,795,000 3,719,267 1,795,000
========== ========= ========== ==========
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
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<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months
ended June 30,
1997 1996
Cash flows from operating activities:
Net loss $ (291,964) $(63,536)
----------- ---------
Adjustments to reconcile net income
to net cash provided (used) for
operating activities:
Depreciation 13,175 15,000
Amortization-film production costs 1,110,382 155,800
Amortization-goodwill 140,260
Stock option compensation 18,750
Changes in assets and liabilities
which affect net income:
Accounts receivable (294,556) 12,951
Film costs (658,225) (65,114)
Other assets 17,482 (1,086)
Accounts payable and accrued expenses 297,982 (191,906)
Income taxes payable (80,000) 137,154
Advances from customers (535,730) 80,500
----------- ---------
Net cash (used for) provided by
operating activities (262,444) 79,763
---------- ---------
Cash flows from investing activities:
Purchase of equipment (16,455) (9,809)
------------ -----------
Net cash used for investing activities (16,455) (9,809)
----------- ----------
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<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six months
ended June 30,
1997 1996
Cash flows from financing activities:
Principal payments of capital lease of obligation (17,503) (21,076)
-------- --------
Net cash used for financing activities (17,503) (21,076)
-------- ---------
Net increase (decrease) in cash (296,402) 48,878
Cash at the beginning of period 687,080 9,277
--------- --------
Cash at the end of period $390,678 $ 58,155
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 35,344 $ 3,722
========= =========
Income taxes $ 191,509 $ 23,712
========= ==========
See accompanying notes to the consolidated condensed financial statements.
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<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
Avenue Entertainment Group, Inc. (the "Company") is principally
engaged in the development, production and distribution of feature films,
television series, movies-for-television, mini-series and film star biographies.
Generally, theatrical films are first distributed in the theatrical and
home video markets. Subsequently, theatrical films are made available for
world-wide television network exhibition or pay television, television
syndications and cable television. Generally, television films are first
licensed for network exhibition and foreign syndication or home video, and
subsequently for domestic syndication on cable television. The revenue cycle
generally extends 7 to 10 years on film and television product.
Basis of Presentation
The accompanying interim consolidated financial statements of the
Company are unaudited and have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-SB for the year ended December 31, 1996. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at June 30, 1997, the
results of operations and its cash flows for the three months and six month
periods ended June 30, 1997 and 1996 have been included. The results of
operations for the interim period are not necessarily indicative of results
which may be realized for the full year.
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<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Film Costs
Film costs consist of the following:
June 30, December 31,
1997 1996
In process or development $ 295,394 $ 224,452
Released, net of accumulated amortization
of $7,972,558 and $6,862,176
1,250,775 1,773,874
--------- ---------
$1,546,169 $ 1,998,326
========= =========
3. Loan Payable
On May 27, 1997, the Company entered into an unsecured demand note
which provides the Company with borrowings (the "Note") in the principal amount
of $250,000, at prime plus 1%, with Fleet Bank, National Association, which is
payable on demand, but in any event not later than May 27, 1998. As of June 30,
1997, $140,000 had been borrowed under the Note at an interest rate of 9.5%.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OR
OPERATION.
The following discussion and analysis should be read in conjunction with the
Company's consolidated condensed financial statements and related notes thereto.
General
The Company is an independent entertainment company which, through its two
operating subsidiaries (Avenue Pictures and Wombat Productions) produces motion
pictures for theatrical exhibition, television and other ancillary markets, both
domestically and internationally.
Pursuant to the Share Exchange Agreement, CineMasters acquired all of the
outstanding capital stock of Avenue Pictures from Mr. Brokaw, the sole
shareholder of Avenue Pictures, in exchange for 1,425,000 shares of CineMasters
Common Stock. In connection with the Business Combination, National Patent made
a capital contribution to CineMasters of 90,566 shares of registered National
Patent common stock valued at $815,000 in the aggregate based upon the closing
price per share of National Patent common stock on the American Stock Exchange
on September 30, 1996 in exchange for 407,500 shares of CineMasters Common
Stock. Such capital contribution was made by National Patent for investment
purposes and was a condition to closing pursuant to the Share Exchange
Agreement.
Following the Business Combination, the Board of Directors and shareholders of
CineMasters approved a transaction pursuant to which (i) all of the assets of
the Wombat Division of CineMasters were transferred, subject to all related
liabilities and obligations, to its newly-formed, wholly-owned Delaware
subsidiary, Wombat, (ii) CineMasters was merged with and into the Company (its
newly-formed, wholly-owned Delaware subsidiary) with the Company being the
surviving corporation in the merger and (iii) each stockholder of CineMasters
received an equal number of shares of the Company in exchange for each share of
capital stock of CineMasters held by such stockholder immediately prior to the
effective time of the Reincorporation. As a result of the Reincorporation,
Avenue Pictures became a wholly-owned subsidiary of the Company.
Results of operations
For the quarter and six months ended June 30,1997 the Company had a loss before
income taxes of $380,000 and $364,000 compared to a loss of $115,000 and $55,000
for the quarter and six months ended June 30, 1996. The increased loss for the
periods was the result of several factors. For the quarter ended June 30,1997,
the Company had significantly reduced licensing revenue at the Company's Wombat
division, partially offset by the revenue generated by the Avenue Pictures
division, which was acquired on September 30, 1996. In addition, for the quarter
ended June 30, 1997, the Company recorded $70,000 of amortization of goodwill
related to the acquisition of Avenue Pictures, as well as increased expenses
related to the operations and the business development of Avenue Pictures. The
increased loss before income taxes for the six months ended June 30, 1997 was
the result of increased general and administrative expenses, primarily salaries
and occupancy costs incurred by Avenue Pictures for the period and $140,000 of
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<PAGE>
amortization of goodwill related to the purchase of Avenue Pictures. These
increased expenses were partially mitigated by the revenue generated by Avenue
Pictures for the period.
Revenues
Revenues for the three months ended June 30, 1997 were $352,000 compared to
$602,000 for the three months ended June 30, 1996. The revenues for the three
months ended June 30, 1997 were derived from revenues generated by Avenue
Pictures which was acquired on September 30, 1996 and the operations of Wombat.
Revenues from the operations of Avenue Pictures for the three months ended June
30, 1997 amounted to approximately $174,000 and were primarily derived from
recognition of the production and overhead fees on the feature film "The Road to
Graceland", which accounted for approximately 49% of the consolidated revenues
for the three months ended June 30, 1997. Revenues from Wombat's operations for
the three months ended June 30, 1997 were approximately $179,000, a decrease of
$423,000 from the comparable period of the prior year. Of the revenues earned by
Wombat during the three months ended June 30, 1997, approximately $120,000 was
derived from the completion and availability of a one-hour motion picture
profile for A&E. The remaining revenue was derived from licensing of rights to
Wombat programming in secondary markets (Janson Associates), which accounted for
32% of revenues in 1997, as compared to 67% of revenues in 1996. The decrease in
revenues earned for 1997 were primarily the result of reduced licensing in
international markets during 1997.
Revenues for the six months ended June 30, 1997 were $2,126,000 compared to
$971,000 for the six months ended June 30, 1996. The revenues for the six months
ended June 30, 1997 were derived from revenues generated by Avenue Pictures
which was acquired on September 30, 1996 and the operations of Wombat. Revenues
from the operations of Avenue Pictures for the six months ended June 30, 1997
amounted to approximately $1,447,000 and were primarily derived from the
delivery to Hallmark of the made-for-television movie "Tell Me No Secrets" and
the recognition of the producing and overhead fees on the feature film "The Road
to Graceland", which accounted for approximately 68% of the consolidated
revenues for the six months ended June 30, 1997. Revenues from Wombat's
operations for the six months ended June 30, 1997 were approximately $680,000, a
decrease of $291,000 from the comparable period of the prior year. The decrease
in revenues earned by Wombat for the six months ended June 30, 1997, were
primarily due to reduced sales of licensed programming in international markets
during 1997. Of the revenues earned by Wombat during the six months ended June
30, 1997, approximately $250,000 was derived from the completion and
availability of two one-hour motion picture profiles for A&E. The remaining
revenue was derived from licensing of rights to Wombat programming in secondary
markets (Janson Associates).
Film Production Costs
Cost of revenues for the three months ended June 30, 1997 was $98,000 compared
to $170,000 for the three months ended June 30, 1996. The decrease can be
primarily attributed to the film amortization relating to Wombat's television
product in the amount of $74,000 for the three months ended June 30, 1997 due to
the decrease in revenues for the same period.
-8-
<PAGE>
Cost of revenues for the six months ended June 30, 1997 was $1,151,000 compared
to $298,000 for the six months ended June 30, 1996. The increase can be
primarily attributed to the film amortization relating to Avenue Pictures
television product in the amount of $900,000.
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses for the three months ended
June 30, 1997 were $634,000 compared to $548,000 for the three months ended June
30, 1996. Included in the three months ended June 30, 1997 expenses are $340,000
of S,G&A expenses relating to Avenue Pictures' operations which were principally
salaries and related benefits and occupancy expenses including approximately
$50,000 relating to costs incurred for future business development. In addition,
the Company recognized approximately $70,000 amortization of goodwill related to
the Avenue acquisition on September 30, 1996. Wombat's reduced SG& A expenses
for the 1997 period were a result of reduced licensing revenues and the related
commission expense, as well as reduced salaries and the effect of increased
capitalized overhead.
Selling, general and administrative expenses for the six months ended June 30,
1997 were $1,340,000 compared to $729,000 for the six months ended June 30,
1996. Included in the six months ended June 30, 1997 expenses are $644,000 of
S,G&A expenses relating to Avenue Pictures' operations which were principally
salaries and related benefits and occupancy expenses, including approximately
$100,000 relating to costs incurred for future business development. In
addition, the Company recognized approximately $140,000 amortization of goodwill
related to the Avenue acquisition on September 30, 1996. Wombat's SG&A expenses
decreased primarily as a result of reduced licensing revenues and the related
commission expense, as well as a decrease in salaries.
Liquidity and Capital resources
At June 30, 1997, the Company had approximately $391,000 of cash and
approximately $707,000 of short term investments.
During the six months ended June 30, 1997, the Company's cash decreased by
$296,000. On May 27, 1997, the Company entered into an unsecured demand note
which provides the Company with borrowings (the "Note") in the principal amount
of $250,000, at prime plus 1%, with Fleet Bank, National Association, which is
payable on demand, but in any event not later than May 27, 1998. As of June 30,
1997, $140,000 had been borrowed under the Note.
The Company believes it has adequate capital resources to meet its short-term
need covering at least twelve months. The Company expects to expand its
production activities. Management believes that the existing cash and short term
investments are adequate to fund the Company's operations, however, management
may seek to raise additional funds, through the issuance of common stock or
issuance of debt, to expand the Company's business at a greater rate. However,
there is no guarantee that such funding will be available, or available under
terms which are acceptable to the Company. The Company's rate of growth and
investment in projects will be adjusted as necessary based on available
financing and existing capital resources.
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<PAGE>
Recent accounting pronouncement
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128), was issued. SFAS No. 128 simplifies the
standards for computing earnings per share, and makes the United States
standards for computing earnings per share more comparable to international
standards. SFAS No. 128 requires presentation of "basic" earnings per share
(which excludes dilution) and "diluted" earnings per share. The Company does not
believe the adoption of SFAS No. 128 in fiscal 1997 will have a material impact
on the Company's reported earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior period earnings per share presented.
Forward-Looking Statements. This report contains certain forward-looking
statements reflecting management's current views with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements, including, but not
limited to the Company's ability to generate an operating profit and the
Company's ability to secure additional financing on acceptable terms.
-10-
<PAGE>
PART II. OTHER INFORMATION
AVENUE ENTERTAINMENT GROUP, INC.
June 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
AVENUE ENTERTAINMENT GROUP, INC.
DATE: August 14, 1997 BY: Gene Feldman
Chairman of the Board
DATE: August 14, 1997 BY: Cary Brokaw
President and Chief Executive
Officer, Director
DATE: August 14, 1997 BY: Sheri L. Halfon
Vice President and Chief Financial
Officer, Director
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023298
<NAME> AVENUE ENTERTAINMENT GROUP, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 390,678
<SECURITIES> 707,419
<RECEIVABLES> 444,039
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,867,467
<PP&E> 264,517
<DEPRECIATION> 143,745
<TOTAL-ASSETS> 5,867,467
<CURRENT-LIABILITIES> 1,356,031
<BONDS> 0
0
0
<COMMON> 37,478
<OTHER-SE> 4,473,958
<TOTAL-LIABILITY-AND-EQUITY> 5,867,467
<SALES> 2,126,312
<TOTAL-REVENUES> 2,126,312
<CGS> 1,150,828
<TOTAL-COSTS> 2,490,643
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,344
<INCOME-PRETAX> (3,643,331)
<INCOME-TAX> (72,367)
<INCOME-CONTINUING> (291,964)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (291,964)
<EPS-PRIMARY> (.08)
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</TABLE>
